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Virtual worlds take on a life – and economy – of their own

By Alan Breznick

Seeking to aid real-life financial investors, Robert Bloomfield is spending a lot of time on his own "Fantasy Island" these days.

Bloomfield, an accounting and management professor at the Johnson School, has become a regular "resident" of Second Life, an increasingly popular online virtual universe. In a colorful, computer-simulated world where online gamers can frolic and fly and just about anything goes, he's exploring what happens when financial scandals and other real-world economic problems intrude on virtual paradise. ?

Inhabiting the Second Life universe as an avatar appropriately named Beyers Sellers, a cartoon-like character clad in jeans and T-shirt, Bloomfield resides in a comfy island cottage with a boat near the beach. From there, he roams around the computer-generated world, studying how its different economic players interact in a totally unregulated environment.

"It's sort of the Libertarian's dream," Bloomfield said. "At this point for me, the number one lesson from Second Life is how effective those types of voluntary alternatives to regulation will be."

In the process, Bloomfield is exploring how to make Second Life (SL) a safer, more reliable place for online users to conduct business. He's keeping tabs on such fledgling, homegrown groups as the Second Life Exchange Commission and Second Life Bar Association as they try to craft voluntary guidelines for deterring theft, fraud, money laundering, tax evasion, and other scams in SL's totally freewheeling economy.

"All of these groups are very early in development," said Bloomfield, who has been drawing increasing media attention for his work. "But it's becoming clear what challenges they face."

Booming Virtual EconomyAn online boomtown created four years ago and still operated by Linden Lab, a San Francisco-based computer simulation developer, Second Life is now home to about 9.7 million "residents," or subscribers, from 100 real-world nations. Flying and teleporting (moving instantly from one location to another) around the world's numerous regions like cartoon superheroes, account holders chat, play, and indulge in fantasy lives, assuming different identities and switching shapes, genders, and species as they please.

Robert Bloomfield, Nicholas H. Noyes Professor of Management and professor of accounting, and his Second Life avatar, Beyers Sellers

But, besides having fun, Second Life participants also look to make virtual money so they can eat fine food, buy nice clothes, start businesses, trade goods, own homes, and make investments in their make-believe world, just as they do in the real one outside. As a result, Second Life, with its own Linden dollar that can be exchanged for genuine cash, boasts dozens of companies, 20 to 30 banks, three stock exchanges, several casinos, at least one bar association, and a thriving real estate market.

"The important thing for people to understand about Second Life is that it truly does have an economy," Bloomfield said. "This is not just a game. . . . Second Life is a lot like first life."

A Second Life resident since the start of the year, Bloomfield is using the virtual world to study how different types of accounting rules affect financial investors. An experimental and behavioral economist who directs the Johnson School's Simulation Laboratory, he was asked by the Financial Accounting Standards Board (FASB) to investigate the issue last fall. So he promptly turned online for ways to test his economic theories in a simulated world where nobody could get hurt.

"I needed a world with a lot of players interacting in complicated ways," he said. "It's hard to experiment with the economy in real life. People get upset."

Bloomfield also wanted to experiment with a completely laissez-faire economy where financial regulation did not yet exist, similar to the boom-and-bust U.S. economy of the late 19th century. As he proposed in a recent academic paper, "Worlds for Study,"1 he wants to start a collaborative effort to create virtual worlds for studying real-world business in tandem with other educators, researchers, authors, and game developers. Unable to accomplish this goal quickly, however, he adopted Second Life as his online economic lab, at least for the time being.

"The important thing for people to understand about Second Life is that it truly does have an economy. This is not just a game." – Professor Robert Bloomfield

Suffice it to say, it's a far cry from the snowy hills of Ithaca. "It's taken on a life of its own," he noted. "I think virtual worlds are probably here to stay. I'm finding it fascinating."

Bloomfield is not the only Cornell University faculty or staff member involved in Second Life. Indeed, the Cornell Computer Science Department bought an island on the virtual world about a year ago as a space for learning and experimenting.

Virtual Lecture Hall
But Bloomfield is definitely leading the way. With the help of a huge magic box on his virtual island that enables him to create all sorts of different structures, including an old-fashioned one-room school house, he's now teaching a course about Second Life from within the self-contained Second Life universe. Since mid-September, he's been using the virtual school house to host real-world lectures for his new, directed-study elective, NMI 501: Business and Oversight in Second Life.

The innovative course covers business and policy in the "metaverse" of virtual worlds and related technologies. In particular, students study different aspects of the Second Life economy and write papers about what they find.?

"There's a lot to study in Second Life," Bloomfield said. "It's a means to an end� It's [the course is] for people with interest in law, business, technology, government, and policy."

The elective has also spawned a full-blown public speaker series called "Metanomics," which is part of the course but open to all who are interested. Developed in conjunction with Metaversed.com, a clearinghouse for information on business and technology in virtual worlds, the class features such notable speakers as: Sandra Kearney, IBM's global director for 3D Internet and Virtual Business; Dan Miller, senior economist of the U.S. Congress Joint Economic Committee; and Richard Bartle, author of Designing Virtual Worlds and co-designer of the "MUD," or Multi-Use Dungeon, which forms the basis of today's virtual worlds.

These speakers drive home the reality that companies, government agencies, social scientists and educators are increasingly using virtual worlds for a variety of serious purposes, including research, demonstrations, instruction, training and collaboration. For example, in her late September speech, Kearney focused on how IBM is conducting simultaneous orientation sessions for employees across the globe in Active Worlds, the company's proprietary virtual world.

With the course, Bloomfield is tackling such weighty issues as whether real-world regulators should crack down on computer-simulated communities like Second Life. The issue has gained growing attention in recent months because of the swift expansion of Second Life, as well as a recent string of embarrassing financial scandals in the fantasy world.

In one prime example, an online user with privileged information hacked into the computers of the World Stock Exchange, one of the Second Life virtual exchanges. The hacker made false deposits into the exchange and then took off with $10,000 in Linden dollars, worth about $40 in actual U.S. dollars at the exchange rate of about L$260 or $L270 for every real greenback.

In a more glaring case, Ginko Financial, one of Second Life's virtual investment banks, abruptly declared financial insolvency over the summer. The three-and-a half-year-old bank,

Professor Robert Bloomfield, as avatar Beyers Sellers, moderated a panel discussion on the major stock exchanges in Second Life. The Metaversed Geek Meet. held on Dr. Dobbs Island in Second Life last July, was cosponsored by Dr. Dobbs Journal, Information Week, and Cornell University. Panelists described the current state of the markets and what they hope to see in the future, particularly regarding regulatory and non-regulatory ways to strengthen investor confidence. A podcast of this Geek Meet is available at http://metaversed.com/node?page=12.

which had been promising annual returns as high as 48 percent to investors, shuttered its doors without paying out a cent of its 200 million Lindens (about $750,000 in U.S. dollars) in deposits to customers. As a result, a few customers reportedly lost as much as $10,000 in cold hard cash.

Incidents like these have prompted calls for intervention by Linden Lab, state, federal, or even international officials. In Great Britain, for example, both the Fraud Advisory Panel and the Institute of Chartered Accountants have warned that Second Life could be prone to money laundering, identity theft, and credit-card fraud. More ominously, the two groups have warned that real-world terrorists could use Second Life to raise funds and plan attacks.

Even a few Second Life pioneers who have fiercely opposed outside regulation now concede that it may be necessary after all to curb market abuses. Take Benjamin Duranske, an intellectual property lawyer in Boise, Idaho who has taken a year off from his practice to publish Virtually Blind, a blog that covers virtual laws and legal issues. Although he doesn't want federal intervention, Duranske, who inhabits Second Life through his avatar, Benjamin Noble, believes that the recent scandals will be hard for regulators to ignore.

"Regulation is inevitable," he told CFO.com. "It's inconceivable that the Securities and Exchange Commission (SEC) is not going to pay attention to the fact that someone is running a stock exchange and that something that looks an awful lot like money is changing hands on it."

The big question, though, is who should do the regulating. Even with the current drumbeat for greater market oversight, there's far from consensus on what type of oversight would be suitable. Some Second Life residents and virtual world experts still favor self-regulation and greater transparency while others believe the SEC, Internal Revenue Service (IRS) or some other government agency should get involved.

Catherine Fitzpatrick, a Russian translator and Second Life landlord whose avatar goes by the name of Prokofy Neva, aims even higher than the federal government. She contends that the United Nations might make the best Second Life overseer, even though it doesn't specialize in economic regulation. She also argues that self-appointed institutions like the proposed Second Life Exchange Commission are doomed to failure because of a lack of checks and balances.

"In RL (real life), the SEC is an independent but federal U.S. government entity," Fitzpatrick wrote in a recent online debate with Bloomfield on his blog site [metaversed.com/robert-bloomfield/blog]. "It's not founded by some guy named Frank. It is an arm of the democratically elected and more or less accountable U.S. government with a Congress, a judiciary, as independent branches, and the 4th Estate, the press, all affecting its transparency and periodically challenging it."

For his part, Bloomfield thinks that self-regulation still might work in Second Life, given half the chance. But, like Duranske and Fitzpatrick, he's far from sure that it can because of self-regulation's less-than-stellar track record in the real world.

"Will it work?" asked Bloomfield. "I don't know. We haven't seen a whole lot of Libertarian success in the world. How many countries go without U.S.-style regulation and have successful financial markets?"